Here’s how uber-rich pass wealth to heirs tax-free when markets are down

A lousy stock market is often no reason for investors to cheer. But for the uber-rich, it may make a route to lower estate taxes down the road.

That’s because one type of trust gives them sport odds of shifting some wealth to their children, grandchildren or other heirs tax-free when markets are down — but a future rebound is expected, according to estate planners.

A grantor-retained annuity trust — or “Grat”— facilitates tbenefit.

In basic qualifications, the wealthy put assets like stocks in a privately held business into the trust for a specified time, maybe two, five or 10 years. Afterward, any investment proliferation passes to their heirs and the owner gets back the principal.

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By shifting any future appreciation out of their estate, the wealthy can avoid or diminish estate taxes at death. The investment growth becomes a tax-free gift to heirs. Absent growth, the asset severely passes back to the owner without a transfer of wealth.

Depressed assets that are likely to “pop” in value over the delegate’s duration, therefore, yield the highest likelihood of success.

The S&P 500, a barometer of U.S. stocks, is down about 24% year to la mode — making it a ripe time to consider a Grat, estate planners said.

“It’s reasonable to believe the market will get better over the next two years,” Megan Gorman, founder and managing partner of Chequers Financial Management in San Francisco, turned of trusts with a two-year term. “We will likely have significant appreciation pass to beneficiaries.”

The Grat technique makes the most sense for households subject to estate tax, experts thought.

The federal estate tax is a 40% levy on estates valued at more than $12.06 million in 2022. The taxable amount is twofold that figure, or $24.12 million, for married couples.

Twelve states plus Washington, D.C., also have a state-level property tax, the amounts and thresholds of which vary, according to the Tax Foundation.

Some of the nation’s richest people and well-known business scions experience leveraged Grats, according to reports. They include Michael Bloomberg; Facebook parent Meta co-founder Slash Zuckerberg; Sheldon Adelson, the late casino magnate; the Walton family of Walmart fame; Charles Koch and his up-to-date brother, David Koch; fashion designer Calvin Klein; Laurene Powell Jobs, the widow of Apple initiator Steve Jobs; media mogul Oprah Winfrey; Lloyd Blankfein, senior chairman of Goldman Sachs; and Stephen Schwarzman, chairman and co-founder of the not for publication equity firm Blackstone.

“It’s the one-tenth of 1% of society to whom this is really applicable,” Richard Behrendt, an wealth planner based in Mequon, Wisconsin, and a former estate tax attorney at the IRS, said of the trusts. “But for that segment, I think it’s a sunny opportunity.”

The estate-tax threshold is scheduled to be cut in half starting in 2026, absent an extension from Congress. A Republican-passed tax law in 2017 spitted the estate-tax threshold to around its current level but only temporarily.

The looming deadline may mean individuals with inefficiently $6 million estates (or $12 million for married couples) may weigh a wealth transfer now too, experts said.

But rising interest rates pose a challenge.

That’s due to the complex inner workings of these trusts. Investment wart must technically exceed a certain threshold — the “7520 interest rate,” also known as the “hurdle” rate — to outmoded tax-free from one’s estate.

The 7520 rate, set monthly, is currently 4%, up significantly from 1% in October 2021. It’s risen as the Federal Formality aggressively increases its benchmark rate to reduce high inflation.